Bank of Korea Gov. Rhee Chang-yong [Photo by Joint Press Corps]
South Korea’s central bank kept its policy rate unchanged for a seventh consecutive time at 3.5 percent amid downbeat prospects for economic growth in 2024 as well as mounting risks of defaults among household and corporate borrowers.
The decision comes as concerns grow about the potential impacts of a rate hike on the South Korean economy, with 2024’s economic growth already revised downward to 2.1 percent from 2.2 percent as project financing and household loans risks increase.
The Bank of Korea (BOK)’s monetary policy board left the rate at 3.5 percent, saying that “financial uncertainties have grown amid a long-lasting sluggish economic slowdown.” It kept its previous economic forecast for 2023 at 1.4 percent but lowered 2024’s growth rate to 2.1 percent from 2.2 percent.
According to the Industrial Activity Statistics, industrial activity in the economy, production, consumption, and investment all lagged in October 2023, marking a 1.6 percent decline in all production sectors. The decline was the largest in the three and a half years since April 2020.
Recent inflation data from the United States significantly diminished the chance of the U.S. Federal Reserve (Fed) implementing another rate hike and the stability in international oil prices also alleviated pressure on the BOK to raise the policy rate.
For the BOK, however, lowering the key rate before the United States could pose challenges amid the continued rapid growth of household loans since April 2023. The benchmark interest rate divergence between South Korea and the United States hit a record level of 2 percentage points, heightening the risk of a surge in the won-dollar exchange rate and foreign capital outflows.
Ongoing geopolitical conflicts, notably the Israeli-Hamas war, are also adding uncertainty to oil prices and increasing inflation risks, making it challenging for the BOK to implement rate cuts in a quick move. The central bank also revised its consumer price inflation forecast for 2024, increasing it from 2.4 percent to 2.6 percent.
[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]